Islamic Microfinance

Programmes that provide credit and savings services have been promoted in recent years by governments, international development organisations, local non-governmental organisations (NGOs) and grassroots bodies as a key strategy for alleviating poverty in low-income countries (and increasingly also within poor communities in high income countries) and to help achieve the Millennium Development Goals (MDGs). Indeed 2005 was designated as the “Year of Microcredit” by the United Nations. At the same time there has been a proliferation of institutions providing credit and loans services to poor or disadvantaged sectors of the population. This has been accompanied by a burgeoning literature evaluating the impact of such programmes and offering advice to service providers on how credit and savings schemes should be structured and programmes implemented.

However, very few of these initiatives have adhered to Islamic financing principles even when their work is undertaken in largely Muslim countries. Unsurprisingly, therefore, there is a dearth of literature documenting the success or otherwise of Islamic microfinance programmes. This, in turn, has meant that organisations wishing to create microfinance initiatives that conform to Islamic financing principles are faced with a distinct lack of guidance on how to establish and implement microfinance programmes. A great opportunity has been missed. Nevertheless, anecdotal evidence suggests that the demand for microfinance services based on Islamic principles is great – there are, after all, some 1.3 billion Muslims worldwide. In the absence of successful microfinance programmes adhering to Islamic financing principles many Islamic donors have tended to shy away from such initiatives and concentrated instead on relief and rehabilitation programmes thereby limiting the resources available to those organisations wishing to implement Islamic microfinance programmes. At the same time, many Muslims refrain from using financial services that do not adhere to Islamic financing principles for fear of breaching their religious beliefs – certainly there is anecdotal evidence to suggest that the proportion of Muslims using financial services is less than their non-Muslim counterparts. It would be reasonable to suppose, therefore, that the growth and development of many Muslim owned small businesses is constrained as a result of the unavailability of Islamic financial services.

The purpose of this document is to show how microfinance programmes based on Islamic financing principles can be established. It is hoped that this may encourage the provision of microfinance services that conform to Islamic financing principles and eventually, of course, the use of these services by microentrepreneurs. As well as providing a theoretical framework outlining the tenets upon which Islamic financing is based, this document provides practical advice on how such a programme may be structured; guidelines that can be followed when implementing a microfinance programme; as well as advice upon programme monitoring and evaluation. The target audience is organisations that wish to provide microfinance services that conform to Islamic financing principles. This document is, primarily, a practical manual written from a practitioner’s perspective.